Sealed Air Corporation’s SEE first-quarter 2015 adjusted earnings per share of 54 cents increased 63.6% year over year and also outpaced the Zacks Consensus Estimate of 42 cents, a positive earnings surprise of 28.6%.
Including special items, viz. restructuring and other associated costs in the reported quarter, earnings stood at 46 cents per share compared with 33 cents in the year-ago quarter.
Total revenue jumped 4.4% on a reported basis to $1.746 billion in the quarter and also surpassed the Zacks Consensus Estimate of $1.743 billion. On a constant dollar basis, net sales increased 3.5%, mainly due to a favorable price/mix of 3.2% as volumes remained flat year over year.
Region-wise, sales were led by 6.6% growth in Latin America, followed by 4.6% rise in Japan, Australia and New Zealand. Sales increased 3.1% in North America and a modest 3% in Europe, while increasing 2.9% in Asia, Middle East, Africa and Turkey (AMAT). However, sales from Developing Regions accounted for 24.9% of net sales.
Cost and Margins
Cost of sales declined 7.7% year over year to $1.1 billion. Gross profit edged up 1.6% year over year to $649.6 million. Gross margin expanded 220 basis points (bps) year over year to 37.2% in the quarter.
Selling, general and administrative (SG&A) expenses decreased 4.5% to $427.1 million in the quarter from $447.4 million in the prior-year quarter. Operating profit increased 19.6% year over year to $183.6 million.
Adjusted earnings before interest, taxes and depreciation and amortization (EBITDA) for the quarter increased 13.1% to $284 million from $251 million in the prior-year quarter. Adjusted EBITDA margin expanded 260 basis points to 16.3% from the prior-year quarter aided by favorable price/mix and the company’s ongoing commitment to operational excellence.
Segment Performance
Food Care: Net sales in this segment went down 2.7% year over year to $880 million. On a constant dollar basis, net sales increased 5.8%. However, currency had a negative impact of 8.57% on net sales.
Adjusted EBITDA increased 19.8% year over year to $191million, driven by favorable mix and price/cost spread, positive volume trends as well as cost synergies. However, these benefits were partially offset by unfavorable currency translation and higher SG&A expenses.
Diversey Care: In this segment, net sales were at $468 million, down 7.4% year over year on a reported basis. On a constant dollar basis, net sales increased 1.5%. Currency had a negative impact of 8.9% on the segment’s sales.
Adjusted EBITDA decreased 7.7% to $41 million from $44.4 million. The segment’s performance was in line with prior-year quarter due to cost synergies, which were more than offset by unfavorable currency translation and higher SG&A costs.
Product Care: The segment reported net sales of $377 million, down 4.2% year over year on a reported basis. On a constant dollar basis, net sales increased 1.1% driven by a favorable price/mix of 3.4%. However, volumes declined 2.3 year over year.
Adjusted EBITDA increased 9.4% to $76 million year over year, attributable to a favorable mix and price/cost spread as well as cost synergies, partially offset by unfavorable currency translation, higher SG&A costs and lower volume.
Divestment and Acquisition
Sealed Air sold its North American trays and absorbent pad business to NOVIPAX, a portfolio company of Atlas Holdings LLC. This business was included in Sealed Airs Food Care division and generated net sales of $52 million in the first quarter of 2015.
The company also announced the acquisition of Intellibot Robotics, a U.S.-based privately-held company. Intellibot Robotics, a leading company in the development and commercialization of robotic commercial floor cleaning machines, will be incorporated into the Diversey Care division. This acquisition is not material to Sealed Airs consolidated financial results
Financial Updates
Cash and cash equivalents were $536.3 million as of Mar 31, 2015, up from $322.6 million as of Dec 31, 2014.
Cash flow provided by operating activities in the reported quarter was $319 million comopared with an usage of $932 million in the prioe year quarter. In Mar 2015, the Company received a tax refund of $235 million related to the Settlement agreement payment. Excluding the tax refund, cash flow provided by operating activities in the quarter was $84 million, compared with cash used by operating activities of $3 million in the prior-year quarter.
Free Cash Flow, was an inflow of $63 million in the first quarter compared with an usage of $31 million in the year ago-quarter, excluding the Settlement agreement.
The company’s net debt decreased $279 million from the sequentially prior quarter to $3.8 billion as of Mar 31, 2015. This decrease was as a result of an increase in cash reflecting the tax refund related to the Settlement agreement payment and cash generated from operating activities, partially offset by amounts paid for dividends and share repurchases.
Guidance
The company in Feb 2015, provided its 2015 outlook that included approximately $200 million in sales from trays and pads. The trays and absorbent pads divestiture closed on Apr 1, 2015, and hence, the outlook provided now includes one quarter of financial results from this divestiture.
For 2015, Sealed Air expects net sales to be approximately $7.1 billion. The company has factored in an unfavorable impact of 9% from foreign currency translation. Excluding the impact of foreign currency translation and the trays and pads divestiture, organic net sales are expected to increase about 3% on a constant dollar basis.
Adjusted earnings per share are currently projected in the range of $2.08 to $2.15 and exclude the impact of special items.
Adjusted EBITDA is now estimated to be in the range of $1.14 billion to $1.16 billion, which reflects the sale of the trays and absorbent pads business and includes roughly $100 million of unfavorable currency translation.
For 2015, Sealed Air anticipates capital expenditures of approximately $210 million and cash restructuring payments of approximately $120 million. Free cash flow is expected to be approximately $575 million, excluding the tax refund of approximately $235 million received in Mar 2015 related to the Settlement agreement payment.
Our Take
The company remains focused on its value-added selling approach and on earnings quality improvement initiatives, both of which are expected to contribute to organic sales growth and margin expansion for the rest of 2015.
Sealed Air carries a Zacks Rank #4 (Sell). Stocks to consider in the same industry include Berry Plastics Group, Inc. BERY, Astec Industries, Inc. ASTE and AO Smith Corp. AOS. All of these hold a Zacks Rank #2 (Buy).
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